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With all the excitement about its digital changes, Walmart's core terrestrial operations may have flown under the radar. Last year total revenue increased 3%, with the heavily watched Walmart U.S. comparable sales increasing 2.1%. While this figure was the highest growth rate since 2009, it does include e-commerce growth of 44%, which points to much slower growth from the physical channel.

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Needless to say, Walmart will continue to be led by its in-store sales for the intermediate future, and should work to grow traffic and sales in the channel. Its newest strategy should accomplish both goals, and deep-value retailers should be worried.

Going downscale for dollars

According to a research note from Raymond James, Walmart plans to go downscale to compete with dollar stores like Dollar Tree(NASDAQ:DLTR) and Dollar General(NYSE:DG). Walmart has been aggressive about discounting prices to compete against these deep-discounters, and the analyst firm feels Walmart is breaking through: it is downgrading the entire value-store segment.

Walmart grew its top line 3% last year, while Dollar Tree and Dollar General reported revenue growth of 7.4% and 6.7%, respectively. Therefore it makes sense for Walmart to try to compete with Amazon for the growing e-commerce business and for higher-end shoppers, while aggressively pursuing the growing dollar-store consumer cohort to grow foot traffic at the store level.

Tax cuts afford Walmart a great opportunity

Something to watch for in Walmart's results is the effect these plans have on margins. In the important holiday quarter, Walmart reported gross margins 61 basis points (0.61%) lower than in the prior-year's quarter, blaming product mix from sales in its e-commerce channel. It's likely aggressive discounting to beat dollar-store prices will continue to drag the company's above-the-line margins (operating margins, gross margins) lower.

However, it's a good time for Walmart to compete on discounting, because it's likely bottom-line profit margins will be aided by the recent GOP-led tax cut. The company forecasts a small yearly decrease in margins next year, but could surprise to the upside if lower prices lead to more foot traffic, sales, and store-level efficiency.

More broadly, however, it shows that although Walmart's attempts to compete with Amazon are widely covered, the company is wisely going down-market at the same time to win back the lower-income consumer. It was the bargain-hunter that built the Walton empire, so it makes natural sense for the company to try to retain this market.

Author

Inspired by the idea of "making your money work for you" at a young age, mostly because he was a lazy child, Jamal parlayed that inspiration into a love of the psychology of markets, competitive advantages, and thematic investing. He later shrug off that laziness, with a career that included stints as a mortgage trainer, a financial advisor, a Sr. Investments Communications Specialist, and a stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance, American University with a masters in finance, and is a CFA charterholder.